Assessing Your Spending Habits

Congratulations! You just took the most important step on the road to financial
recovery. To varying degrees, we all live in a self-imposed fog when it
comes to spending money. Spending becomes a comfortable habit — just the
way you go about your daily life — and habits are always hard to break. But
you’re on your way. Now that you’ve committed yourself to recovery, you
can take a closer look at where your money is going, consider the possibility
that overspending is a habit, and, if it is, examine ways to deal with it.

Okay, documenting your expenses has proven the obvious: You’ve wasted
money and probably made some lousy financial decisions. Who hasn’t? (If
you haven’t assessed your spending habits, see the section “Comparing
Spending and Income,” earlier in this chapter.) Now that you have a handle

on the problem, you’re in position to take control. With the right attitude,
eliminating unnecessary expenditures can be a little like a treasure hunt.
There’s extra money out there — you just have to find it!

Although we don’t presume to tell you how much to spend on any particular
item — that’s your call — here are a few things to zero in on:

Credit card payments: If a big chunk of your monthly income is going
to pay credit card bills (especially if you’re paying minimum payments),
bankruptcy may be the best solution by far (see Book III, Chapter 5).
If this is the case, you’re just spinning your wheels in the worst of all
worlds — paying interest without significantly reducing the principal
amount of the debts. For example, say you’ve got a fairly modest credit
card debt of $3,000. At 17 percent interest — and a lot of times the interest
rate is even higher — you’ll be indebted to the credit card company
for about 35 years if you just make minimum payments.
Daily dribbles: We all live our lives amid daily patterns that eventually
become habits. Many times, these habits include unnecessary spending
that provides no real benefit or enjoyment. What seems like small stuff
eventually adds up. Again, consider the latte on the way to work, the
buck you put in the soda machine, and the $2.50 you spend for an afternoon
snack — all without even thinking about it, right? Over the course
of a year, you’ve blown $1,430. If you invested this money for 20 years at
10 percent interest, you’d end up with more than $80,000!
Extravagances: True, one person’s luxury is another’s necessity, but
you really need to think long and hard before plopping down $100 at a
restaurant or $60 for a pay-per-view prize fight on TV. It’s sometimes
helpful — though painful — to figure out how much work you had to do
to pay for a particular treat. If a night on the town costs you a day and a
half of work, is it really a good return on your investment?
Impulse purchases: In the section “Cataloging What You Own,” later in
this chapter, we ask you to list all your belongings; for now, just make
a trip to your attic, basement, and garage. If you’re like most people —
and us — you’ll see tons of stuff you’ve bought but rarely, if ever, use.
Simplify. And go further: Sell.
Gifts: Studies show that many folks spend lavishly on gifts they would
never buy for themselves. Christmas, of course, is the granddaddy of
budget-busters. Scale back gifting.
Overwhelming mortgage payments: If you obtained your mortgage
recently, most of your monthly payment goes toward the interest. You
may not have much equity, and the home may not be worth keeping —
especially if it’s a second mortgage.
Killer car payments: New cars are awfully pricey these days. If you’re
struggling to maintain payments on a new car, you may want to consider
selling it and buying something more affordable. Plenty of reliable, moderately
priced used cars are on the market.

Totaling spending and earnings

Add up the numbers in each of the three spending categories in Table 1-1 to
get a subtotal for each category. Then add up the subtotals. The final number
represents the amount you are currently spending each year.

Next, add up all the income you received during the same 12-month period.
Take into account not just your net household income (your take-home pay,
which is gross income minus all deductions including taxes), but also any
other income you or your spouse or partner may receive: government benefits,
investments, royalties, child support or spousal support, income from a
family business, and so on. Record that total on your worksheet.

If you are entitled to child support and/or spousal support but the payments
rarely come, don’t include those amounts when you calculate total annual
income for your household. If it’s unreliable income, you can’t count on it to
help cover your spending.

Calculating your financial bottom line

When you have a total annual income amount and a total annual spending
amount, subtract your spending total from your income total.

If the final number you calculate is negative, you can probably guess what
that means: The amount you are spending is more than your annual household
income. You may be financing your lifestyle by using credit cards and
cash advances, and/or you may be falling behind on some of your obligations.
Furthermore, you may not be paying some of your bills at all, which
means that if you add the amount of those bills into your calculations, you
have an even bigger deficit.

If you ended up with a positive number, your finances may be in better shape
than you think. Or not. If the number is small, you may be just barely staying
ahead. And if your bottom line is positive only because you’re paying
just the minimum due on your credit cards each month or because you’ve
stopped paying some of your debts, you have no cause for celebration. If this
describes your situation, you are treading water, at best, and a financial setback
such as a job loss or expensive illness could be devastating.